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DTC Explainer: Everything You Need to Know about Direct-to-Consumer

DTC selling has taken the reins in the apparel and footwear industries, upending the entire business in the process.

Anyone who has a social media account is surely familiar with DTC sellers—they’ve become inescapable by this point—but one can be forgiven for being a bit perplexed about where they came from, how they operate, and what makes them so different from more traditional types of selling.

In this DTC explainer, we wade through the ins and outs of everything you need to know about the burgeoning channel.

What is DTC?

First thing’s first: DTC stands for direct-to-consumer. Just as its name indicates, companies that employ a DTC model cut out the retailer. By foregoing wholesale, the control their distribution by selling products straight to the end consumers.

Where did DTC selling come from?

Taken in the most literal sense, DTC selling isn’t anything new. Sellers have, of course, been hawking their goods straight to consumers since the beginning of time. But whenever you read about the “disruption” that DTC selling has caused (or is causing), it’s typically referring to the period that began in the late aughts, which is when the acceleration of e-commerce combined with the onset of the Great Recession to result in the decline of brick-and-mortar retail selling. The advancement of inexpensive and accessible social media advertising in more recent years has only helped throw gasoline on the DTC flames.

One of the most-cited inaugural modern DTC sellers includes men’s wear brand Bonobos, which launched an e-commerce site in 2007 aimed at men who disliked shopping and craved better-fitting clothes. The company, which was acquired by Walmart in 2017, opened its first showrooms in 2012 and now operates more than 60 physical locations, according to its website. The majority of these locations, however, aren’t retail stores—Bonobos instead designates them as “Guideshops.” Consumers can make an appointment for sizing and to receive personalized recommendations, but anything they purchase is later shipped to the buyer’s home or the nearest Guideshop.

The company is also testing a “try before you buy” option in Boston that lets consumers select items online and have them shipped to a Guideshop, where they then have the opportunity to purchase them on-site if they’re satisfied with their choices.

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Untuckit is a DTC men's wear brand that's been selling shirts since 2011.
Untuckit is a DTC men’s wear brand that’s been selling shirts since 2011. BCFC/Shutterstock

Famed clothing-rental service Rent the Runway, meanwhile, got its start in 2009 by a pair of women who tapped into the need for temporary access to special occasion clothing. After trialing the service at a pop-up on a college campus, the company launched a website to great fanfare, receiving 100,000 sign-ups on its first day, according to the company. It went on to become one of the few unicorn apparel startups.

(Proving that growing pains can happen at any stage, Rent the Runway made headlines in the fall of 2019 when a high volume of orders were delayed or canceled after the company received a swell in new memberships while also opening a new 300,000-square-foot distribution center. A storm of very vocally unhappy customers followed, and the melee resulted in Marv Cunningham, chief supply officer, exiting after just six months on the job.)

Read enough stories about DTC brands, and you’ll eventually come across a company that’s described as the “Warby Parker” of something. Founded in 2010 with the mission to help consumers purchase prescription eyeglasses more easily and affordably, Warby Parker made waves by providing consumers access to a product that had historically been available only through retail stores.

Now there are DTC brands for just about every category, and the landscape has become more crowded than ever, helped by millennial and Gen Z consumers.

How is DTC different than retail?

While some DTC brands have brick-and-mortar retail locations, many of these brands sell exclusively via e-commerce. (See also our explanation of “What is a Digital Native?” below.) Brands that do sell through physical retail often do so as a way to test the waters for new products and/or retail expansion, amplify their brand message, supplement their online sales or to boost customer acquisition, which can be costly online.

DTC brands that sell at physical retail have a few different paths. Some partner with such retail-as-a-service (RaaS) providers like b8ta and Leap, which help emerging brands set up shop in stores and pop-ups, or open their own locations. RaaS companies promise to do much of the heavy lifting for DTCs interested in physical retail selling, but either don’t want to undergo the onerous process of opening their own stores or just want help doing so.

The Built by b8ta service provides DTC brands with everything from fixtures and staff training to data analytics and logistics, while Leap touts its turnkey solutions that find locations, sign the lease, set it up and train the staff. All of these solutions are meant to make a DTC brand’s retail entrance as easy as possible.

Selling direct to consumers doesn’t mean products are only available from the brand’s own websites. Some DTC brands also sell through other platforms, such as Mavely, a “curated shopping and discovery platform” where consumers can choose from more than 100 DTC brands.

Shopping malls are also embracing DTCs and RaaS, hoping they will help boost foot traffic after years of declines. Simon Property Group teamed with Appear Here and AllWork for The Edit, a retail platform for DTC brands. Washington Prime’s Tangible Collective rotates DTC brands at marketplaces in four of its locations.

“We’ve learned that brands are very hungry to get into physical space, as they know it’s a necessary avenue to continue growth,” Erin Urbanek, Washington Prime Group’s ventures associate, said.

How is DTC different from a traditional wholesale model?

In a wholesale model, goods are purchased from a manufacturer and sold to a retailer. Consumers then purchase the goods from the retailer. In a DTC model, brands control both their own production and distribution by selling the goods directly to the consumer.

With that said, just as some DTCs sell at retail, some DTCs also sell their goods wholesale. Having multiple channels of distribution is one way for a DTC brand to have a more stable and sustainable business model. Selling their products via DTC is also attractive to wholesalers who want to take advantage of the higher gross margins their goods will fetch, said Eric Fisch, national head of retail at HSBC.

How are DTC production needs different from traditional apparel sellers?

Given that many DTC companies make their scratch by having lightning-speed reactions to social-driven fashion trends, it’s not surprising that they often rely on alternative models of production, such as on-demand manufacturing. On-demand production is much as it sounds: Rather than attempting to predict their inventory needs and manufacture the styles and number of pieces they expect to sell, companies leveraging on-demand production don’t manufacture products until they’ve received the orders.

DTC sellers that specialize in customized products may also rely upon on-demand production to provide the highest level of personalization that’s possible. (Learn more about this type of customization in Sourcing Journal’s On-Demand Report.)

In order to maintain this type of production, DTC sellers need to have relationships with factories that can accommodate the rapid turnaround times, as well as smaller minimum order quantities. As DTCs are often new companies with limited experience, some choose to partner with factories that can also guide them through the design and production stages.

What makes a DTC brand successful?  

Every successful direct-to-consumer brand has developed its own secret sauce, but they all have one thing in common: They’re excellent at connecting with consumers.

In fact, the most loyal DTC consumers actually require this level of connection. A report from the Interactive Advertising Bureau (IAB) found that these “direct brand consumers,” who view consumption as the best way to tell the world about themselves, expect “access and input into the companies they support.”

While developing this deep connection may be labor-intensive and even costly, successful DTC companies can reap great rewards when it comes to loyalty. “This deeper relationship not only shows up in loyalty, but actually perpetuates two-way value for both consumer and brand—in the creation of self-as-a brand and building brand awareness through influence,” IAB CEO Randall Rothenberg, said.

Outdoor Voices, a DTC activewear brand, has several shops, including this one in Boston.
Outdoor Voices, a DTC activewear brand, has several shops, including this one in Boston. Outdoor Voices

Stanley Szeto, executive chairman of Lever Style, said during a keynote at Sourcing Journal’s New York Summit that DTC brands’ keen ability to provide specific solutions to real consumer problems are what puts them “in a position to fundamentally serve the consumer better.”

Their lack of experience can also often serve them well as they enter the industry with the ability to look at operations with a fresh perspective. Rather than being tied down to the old way of doing things, the most successful entrepreneurs have developed creative solutions to age-old problems. He cited Stitch Fix founder Katrina Lake as an example. The apparel subscription service launched in 2011 out of Lake’s apartment, and was valued at $2.1 billion as of February 2018.

“People who don’t have a set way of thinking of how this industry should work…In a way, it’s very refreshing because they are willing to accept new ideas and challenge the status quo,” Szeto said.

What is a Digital Native?

A company that describes itself as being a digital native is one that began by selling exclusively through e-commerce. They are typically marked by a fast growth trajectory thanks to a social media advertising strategy.

What are the pros and cons of selling DTC?

The pros and cons of selling DTC apparel and textiles are as varied as the product being sold.

Inventory: For apparel DTC brands, pros include agility and the ability to quickly react to market trends, a must for any company that wants to effectively compete in today’s industry. Since many DTC brands carry limited inventory, they’re more easily able to make quick adjustments to their products because they’re unlikely to be saddled with unsold stock. With social media trends playing a massive role in their success, DTC brands that can quickly produce product reflecting the latest craze stand to benefit greatly.

Limited inventory, however, can also serve as a con. DTC brands may have a difficult time capitalizing on such retail holidays as Black Friday because they may find themselves unprepared for the quick ramp-up of increased consumer demand, and they lack the necessarily historical data that’s required.

Financing: It can be more challenging for DTC companies to obtain financing because their sales model carries more risk than traditional methods. Unlike traditional retailers that can borrow money based on the state of their business and their physical assets, small- and mid-sized direct-to-consumer sellers often have very little in terms of assets other than their inventories and IP, John Stillwaggon, Tradewind CEO for the Americas, old Sourcing Journal.

“Inventory and IP are generally thought of as riskier assets to lend against by the traditional asset-based lenders and factors. IP can be very hard to value, and…the value of the brand and related IP can decline, or go to zero, very quickly—depending on consumer’s tastes,” he said. “The inventory presents a risk because if the [DTC] cannot sell the products at a good price, it’s very unlikely that the lender or the liquidators will be able to.”

As such, lenders will typically advance just a small amount of money against the inventories, he noted, serving as one more challenge for DTC sellers.

Provenance, a growth-stage investor in DTC brands, has developed its own strategy in order to compensate for a lack of historical data. “When we start a conversation, we ask for access to their entire transaction log and customer file,” Choe said. It creates a quantitative and qualitative picture of the business by layering on third-party demographic information. The rest of its due diligence isn’t completed until that data picture indicates alignment between Provenance and the DTC brand.

Marketing: The pros and cons of DTC marketing are much different from those encountered by traditional apparel sellers. For one, many DTC brands rely heavily upon social media as their primary marketing platform, at least initially. The pros for this type of marketing include the easy ability to forge a direct relationship with their customers, a bond that is the hallmark of most successful DTC brands.

However, although social platforms like Instagram and Facebook at one time served as an inexpensive marketing channel for DTCs, the social media giants have increased their prices—and this trend is expected to continue. These price increases mean that the customer acquisition costs for DTCs are rising, the space is becoming increasingly crowded, and it’s more challenging for DTC companies to cut through the noise. One DTC apparel company described Instagram to Sourcing Journal as being in the “Nobody goes there anymore; it’s too crowded” phase.

As such, common advice for DTCs that want to scale has been to look outside of Instagram and Snapchat when advertising. HSBC’s Fisch said he’s seen DTC brands exploring catalogs as one alternative, which he described as being more targeted than social media because brands have the ability to dictate the ZIP codes of the consumers they want to reach—a plus for luxury brands.

“The consumers that resonate with the [reach-out] tend to be people with relatively high net-worth,” he said. “A website can be hard to evoke the feeling of luxury or premium apparel, but when people touch paper–think matte finish–it can evoke a conscious reaction where [the consumer] can now appreciate a brand’s positioning.”

Earned media, meanwhile, has become another worthwhile “old school” method for DTCs to advertise. “It’s easy for me to say, but the best thing to do is generate earned media,” Fisch said, “and we have a couple of brands where the founders/owners are spending a lot more time than they would like doing conferences and generating sort of natural coverage, where previously they wouldn’t have done quite as much.”

With all of this said, the easy and relatively affordable access that social media provide still makes it an attractive option for many apparel and footwear DTCs just starting out. They also offer a way to test the waters for limited edition capsules.